Carolinas Address Pension Issues, But They’re Night and Day

The Carolinas share a border, half of their names, and a need to address problems with their state pension plans. But while both must act, their problems are as different as north is from south.

The Tar Heel State

North Carolina Treasurer Dale Folwell (R) is still new, having taken office just this last Jan. 1. But he immediately began to address an issue that is not new — problems with the pension system for state employees.

The issue for the state pension system is not insolvency. In fact, Retirement Cheat Sheet ranked North Carolina’s state pension fund as one of the 10 best in 2015, 95% funded and with a reserve capable of making payments for nearly another 16 years. Folwell’s office reports that the North Carolina pension system is the 12th largest in the United States. According to WFAE, Charlotte’s National Public Radio station, the state’s pension system has $89 billion and is the “26th largest reservoir of public money in the world.” The pension fund gained 4.1% in the first quarter and assets were up to $92.2 billion, according to the Triangle Business Journal.

For North Carolina’s pension fund, the issue is how its funds are invested and how strong the returns on those investments are. WFAE reports that the state pension is “underperforming” at the same time that it is “paying hundreds of millions of dollars to Wall Street.” This, WFAE points out, has an impact beyond retirees and their dependents, since paying outstanding bills must come before new spending, even on infrastructure and education. “The state has an obligation to first fund what we call debt service payments,” Folwell told WFAE earlier this year.

Folwell told WFAE that in the last fiscal year, the pension fund’s returns on its investments in the last fiscal year were less than 1%, and have been just over 6% over the last 15 years; however, the returns need to be 7.25% per year to cover growth in the number of retirees and increasing longevity.

Part of the explanation is investment in bonds, whose yields are linked to interest rates, which are low. Another part lies in other investments made by Folwell’s predecessor, Janet Cowell (D). Often termed “alternative investments,” they have proven to be somewhat controversial. Such investments involve such assets as real estate, private equity and hedge funds, as well as commodities — all of whose value is known when they are sold.

But while returns have been low, fees have been high. Folwell told WFAE that the fees the state paid Wall Street have risen from $50 million to more than $600 million per year in the last 15 years.

Since taking office, Folwell has cut the fees the state is paying for its retirement plan investments by $15 million. He told Charlotte’s WBTV on June 14 that he has renegotiated or cancelled agreements Cowell had made. Folwell told the Triangle Business Journal that he does not believe that the state will realize the 7.25% rate of return sweet spot, but will come close. He said that he thinks 7% is “attainable” and “seems very reasonable.” He reportedly attributes the reduced expectation to levels of funding from the state government.

The Palmetto State

South Carolina for the most part does not face the woes that beset Folwell. On the other hand, in some ways South Carolina State Treasurer Curtis Loftis (R) may wish he did.

According to the Wall Street Journal, the Fitch Ratings analysis of data from the Bureau of Economic Analysis says that South Carolina’s pension plan ranked 33rd among the states and was 63% funded. Loftis’ department issued a report in January 2017 that said the state pension plan is $24 billion in debt, which it called a “crisis.”

The Treasury attributes the debt to a variety of factors:

early retirements;

long retirements;

the way actuarial assumptions were handled;

cost of living adjustments; and

failing to meet the full interest payment over the last 15 years.

An additional factor is something that South Carolina actually has in common with its northern neighbor: the performance of investments into which state pension funds were placed. The report says that those investments have underperformed the assumed rate of return by more than $10 billion.

The state Treasury has reported that the state has paid nearly $2 billion in fees between 2011 and 2015. At the same time, the fund realized returns on its investments that the Treasury called “subpar”; in February 2016, the Treasury said, the fund had a one-year negative return of -5.58%. State officials have said that the way assets were allocated was at least partly to blame.

Loftis soon will have more money to use to fill the $24 billion hole: In April, South Carolina Gov. Henry McMaster (R) signed a bill that will increase state employee and employer contributions to the state pension system.

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